The Ten Most Common Mistakes in Business Plans

When I sum up the many business plans I have had to review as a juror for various business plan contests, it is clearly evident that some mistakes are made again and again. In the following, I will briefly present my personal top ten list of the most common mistakes.

1. Change your perspective: what does your customer need? Technology vs. Solutions
It is all too natural that you are proud of your invention or development but it can become a real nuisance if you get carried away with enthusing about your technology, filling page after page with all the miracles it can do for mankind. If you overdo it, this can be outright boring. Make sure to explain your invention as briefly as possible and in simple words so that a layman can understand it. Don’t explain every little detail. It is way more important to describe your product(s) and/or service(s) from the perspective of the customer: Who will need your product? What will he/she gain by using it? What technology are your customers using today and do they have to change proven procedures when they switch to your product? And, probably the most important question to find an answer for: why are your customers doing what they do? Could they use alternatives that don’t require your product? The authors of many business plans don’t seem to know what their customers need or have a vague idea at best how their product contributes to the success of their customers. Listen to potential customers wherever you can and make it your business to offer them solutions to their most urgent problems.

2. Mastering the basics: a clear business model or how you want to make a profit
Very often I come across a neat technology that could potentially be useful in a lot of different settings but unfortunately the authors fail to show how they intend to make money with their technology (and how much). There is no need to have a controller calculate your cost including overheads to the third digit after the comma but you should know approximately how much it costs you to make a product or to provide a service (and make sure you don’t forget to spread the costs for research and development over the expected life cycle of your product or service). Knowing your costs is essential for making decisions about what to produce in-house and what to buy or outsource. Basically, you should make a list of all ingredients, equipment, working times (including extra time for failures) as well as overheads (rent, insurances, depreciation, consulting fees etc.) to calculate your costs.
A closely related issue is how you plan to price your product(s) and/or service(s). Obviously, pricing depends on a number of factors that are partially outside your control, such as prices of competing products, available budgets, licensing and/or distribution costs, or possible cross-subsidizing one product category (e.g. instruments) with another (e.g. consumables). As a rule of thumb, your raw margin (i.e. the difference between production cost and your list price) should be higher than 60-80%, otherwise it will likely become difficult to establish a profitable business unless you can scale up your business by at least one order of magnitude in a very short time. In most cases, however, startups will lack the capacity to price their products aggressively and increase their market share quickly because of the massive investments in marketing required by such a strategy. It is therefore often a safer option to ask premium prices to begin with and scale up at a more moderate pace.

3. Present your long term vision
Another frequently encountered weakness is a complete lack of long term goals. Since the development of new biotech products typically takes several years, investors are rather skeptical of „one-product-companies“. Ideally, you should outline the most likely path of development of your company for the next decade or so, taking into account foreseeable developments as well as potential synergies with other emerging technologies. The more specific your goals are the more attention you will get. Use this section to differentiate yourself from the rest of the pack.

4. Comparing your product/service with your competition: common fallacies
By far the strongest argument for the use of a product or service is the ability to solve a problem for which a solution has been lacking so far. Incremental improvements over existing technology are rarely a sufficiently strong basis for a startup company, especially since the world doesn’t stop spinning until you enter the market with your product or service. In fact, you would have to compare your offering to the future competition (which is, admittedly, no easy task). An investment manager of a large VC company once told me that they only invest in projects that promise improvements of at least an order of magnitude (better two) over what is available at the time of investment. Even if this may sound a bit exaggerated, it is important that you illustrate your USP (Unique Selling Proposition, i.e. what sets your product or service apart from others) in numbers rather than use a table with plus and minus signs (or, still worse, checkmarks) to differentiate your product from competing ones.
You should also make sure to not lose sight of the overall process in which your product or service is to be used. For instance, even if you can speed up one part of the process by 90%, it won’t help your customers much if the bottleneck is somewhere else. The same is true if you can cut the cost for one step of a process by 90% when this step only accounts for 10% of the overall cost – a gain of 1% often isn’t worth the trouble of ditching a working process.
One of the most serious mistakes in comparing one’s products with those of competitors is to mix apples and oranges by taking the retail price of the competing product and compare it with the manufacturing cost of the own product (this may sound absurd but this happens quite often). Since there can easily be a tenfold or higher difference between the two, such flaws can’t be attributed to inexperience but are rather a sign for utter naivety or at best sloppiness.

5. Defining your markets: Bottom up and top down
Market reports can be a valuable source of information to get a general idea of the total market size of a product category and the main drivers in the market segment of interest. However, such reports are mostly relatively expensive and often not targeted precisely to your needs. By investing some time in internet research you can sometimes find aggregate sales numbers. But often business plan authors mistakenly equate the market size of larger segments with the market potential of their product. What they ignore is that (i) the market as a whole does not necessarily reflect the development of individual segments and (ii) the present situation is the result of an evolutionary process over the past years and there is a high degree of uncertainty when one tries to extrapolate current numbers to the future.
One should therefore try and verify the market potential by an independent bottom-up analysis. Using a standardized questionnaire one can interview a random sample of potential customers and then extrapolate the data to the total number of customers (which can be guesstimated on the basis of known statistical numbers such as GDP, R&D expenditures etc.). If both approaches yield comparable numbers, you are probably not so far off target.

6. Accessing your markets: getting your product/service to the customer
Knowing one’s market potential may give an indication of how scalable a product is. Still, the more relevant question is what you plan to do to tap this market potential. Many business plan authors remain much too vague regarding this vital topic. A potential investor will want to know who will be your first customers, how do you plan to identify and approach them, what effort will be necessary to find, attract and keep new customers. Which marketing measures are best suited for your product? Do you need to visit customers at their place of work or do you meet them at conferences or trade shows? Is your product or service straightforward to use or do you need sales reps (and how many?) to explain it to your customers. Which aftersales services are required to make your customers stay with you? How do you plan to access the most relevant markets? A lot of questions with not so easy to find answers, especially for novices. Nevertheless, your BP should provide convincing answers and present a budget and a headcount for Marketing and Sales. Even if you plan a licensing business, you must still identify, speak to and negotiate with prospective licensees. To plan such activities in a meaningful way, you should also make yourself familiar with the typical course and duration of evaluation processes in the organisations of your customers.

7. How do you get there? How long will it take? What will be required? What will it cost?
Planning the many activities of a startup business is no easy job – a lot of authors fail to present a logical concept with reasonable and consistent timelines and well defined milestones. If you have no practical experience in project management, you can help yourself by going backwards from your overall goal, analyzing each step that has to be taken on the way thereto. If in doubt, calculate at least 50% more time – experience has shown that problems will turn up where you expect them least. Once you have all the pieces together, the last thing is to arrange them in a so-called Gantt chart to present an overview of all important activities, their timely order and any dependencies between them.

8. Numbers, numbers, numbers
„Much faster“, „cost saving“, „highly innovative“ are often used attributes in business plans, some are virtually paved with them. Exact statements like „our analysis has shown a time reduction of 65% in a typical setup“ are much more informative and better suited to create confidence in your approach . You should therefore go the extra step and do the math to show that you care for details.
The essence of a business plan are well documented or logically deduced numbers. Use numbers to compare your product and/or service with competing ones so as to give the reader a clear measure for the degree of its superiority. When no exact data are available, try to at least indicate a range.

9. What’s in it for your investor?
The return on investment (ROI) is likely the most important number in a business plan. What makes it so difficult to determine this number, is the fact that it depends on a lot of variables (such as the speed of market penetration, the profitability of the business, the duration of the investment, the valuation at the start of the investment and at the time of exit), many of which are usually not directly accessible but have to be based on assumptions instead. Since investors in startup businesses face a relatively high risk of failure, it is not unreasonable that they expect ROIs of 50% p.a. or more. Such returns are usually only achievable with well scalable business models. An additional problem, especially for life science investors, is that their money is locked for a long time because typical development cycles in this field last 5-8 years, sometimes even longer.
Now, if one wants to achieve an ROI of 50% p.a. at an exit 8 years after the initial investment, the value of the acquired shares must have increased by a factor of more than 25 (1.58 = 25.63). Let’s assume the initial investment was 5 million EUR for a 50% share of the company, the total company would have to be valued at 250 million EUR at exit. For a fast growing high tech company one can expect a valuation of between 3 to 10 times of its annual turnover, i.e. the company must have reached an annual turnover of at least 25 million EUR. Although this is an easy calculation, many business plan authors fail to see that it is vital to present a convincing scenario that their business case stands reasonable chances to reach the above numbers if they are looking for VC funding.

10. Team: Think beyond
If you ask a seasoned investor what is the most important factor for the success (or the failure) of a business concept, he or she will very likely tell you that in about 80-90% of the cases it is the team in charge of managing the company (in the remainig 10-20% it is bad timing or strong competition). Even mediocre products can be turned into a success by an excellent team whereas a mediocre team can ruin an excellent product. So what makes a good team? First of all, the right size – less than three are too few and more than six or seven people make it difficult to have clear responsibilities. Second, a good mixture – if you all share the same background, you are much more prone to overlook grave mistakes. Ideally the team members contribute complementary skills and fill the slots in the company’s organigram in a logical way (if not, try to integrate external know-how early on). Third, make sure that common and personal goals match (it is a good idea to define them in writing). Fourth, a good team needs flexibility and should be open to accept new members as requirements change. Fifth, efficient team work need to communicate efficiently. A skilled investor will be able to make a judgment about the quality of the team by means of the above characteristics by carefully reading the business plan and the cvs of the founders. It is therefore important to present a logical team structure (i.e. where personal abilities match the designated function of the corresponding team member). The reader will be alerted if he/she finds any discrepancies in the assignment of tasks or indications for potential conflicts of interest (e.g. long term commitments not compatible with the intended position, conflicting academic goals, non-operative founders who have disproportionately high shares, key positions that are filled with team members lacking adequate experience etc). If there are such issues in your team, don’t try to conceal them but rather address them openly and outline possible solutions.